Taxing tourists politically popular
Even before the current transient accommodations tax was adopted in 1986, the idea of taxing visitors had been politically attractive. After all, tourists don’t vote for local politicians.
The problem with that hypothesis is that while the visitor pays the tax, the local economy bears its burden. The same can be said of the counties which levy a much higher real property tax rate on hotel and resort properties than on other commercial or business properties, let alone residential properties and homeowners.
This has become no more evident than in the latest report of general fund tax collections produced by the department of taxation. Every month, the department issues a “Preliminary Comparative Statement of State General Fund Tax Revenues” which provides tallies of the major tax resources of the general fund. This report includes the largest source of tax revenue, the general excise tax, net individual and corporate income taxes, and collections for the TAT.
The report for November pegs growth in TAT revenues at a positive 9.0 percent while the collections of the GET are down by 3.4 percent compared to last year. Although some of this decline may be attributable to the way the combined collections of the GET and the county surcharge for the Honolulu rail project are allocated this year, even when the combined collections are measured against last year, the amount of GET collected through November is down by 0.2 percent.
Some observers say this may be caused by the suspension of several business exemptions, which expired with the beginning of the current fiscal year. However, most agree the suspension of the two dozen exemptions did not have a significant revenue impact, as the legislation providing for the suspension also provided grandfathered status to many of those who had long enjoyed the exemptions.
State economists say the sharp increase in hotel room rates experienced this past year cut into the discretionary spending of visitors. The higher rates, plus a hike in the TAT rate to 9 percent, appear to have eaten into visitors’ budgets. As a result, less was spent on everything from tours to canoe rides to souvenirs. On the other hand, one would think that the higher room rates would also have resulted in increased GET collected on those rentals. Apparently, those higher rates and, therefore, higher GET collections, were not enough to offset the pull back on visitors’ discretionary expenditures.
If this is what happened, it underscores the hypothesis that increasing the TAT merely steals dollars that would otherwise have been spent by the visitor on other goods and activities. In the end, the owners and employees of those businesses which would otherwise have benefited from visitor spending, were the ones who suffered.
What observers have long opined is that the leisure visitor comes to Hawaii on a budget. So much has been planned for the “vacation of a lifetime” and when major nondiscretionary expenses, such as a hotel room, eats up more of the budget, what is left to spend decreases. There is less dining out or less fine dining and more stops at the fast-food counters or mini markets. There is less on-premise consumption of alcoholic beverages. This, in turn, affects those who work in the bars and restaurants that depend on visitor traffic. Hours may be reduced or positions eliminated because there isn’t enough business to justify a fully staffed shop.
While state and county officials rub their hands with glee at the thought of making the visitor pay more for that hotel room by jacking up the TAT rate or levying higher real property tax rates on hotel and resort properties or time shares, in the end, those higher tax collections come at a cost for businesses and employees who depend on that visitor dollar. Elected officials must realize that, unlike the business traveler who may be traveling on a corporate expense account, leisure travelers — the bulk of Hawaii’s visitors — have a bottom to their travel barrel.
Officials must realize that raising taxes on the visitor is having a negative effect on the state’s economy. In this case, it is much like that old movie title, “Something’s Gotta Give.”
Lowell L. Kalapa is president of the Tax Foundation of Hawaii.